Yatsen Holding Limited (NYSE:YSG) Q1 2023 Earnings Call Transcript

Yatsen Holding Limited (NYSE:YSG) Q1 2023 Earnings Call Transcript May 17, 2023

Operator: Ladies and gentlemen, good day and welcome to the Yatsen First Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Irene Lyu, Vice President, Head of Strategic Investment and Capital Markets. Please go ahead.

Irene Lyu: Thank you, operator. Please note the discussion today will contain forward-looking statements relating to the company’s future performance and are intended to qualify for the Safe Harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company’s control and could cause actual results to differ materially from those mentioned in today’s press release and this discussion. A general discussion of the risk factors that could affect Yatsen’s business and financial results is included in certain filings of the company with the Securities and Exchange Commission.

The company does not undertake any obligation to update this forward-looking information, except as required by law. During today’s call, management will also discuss certain non-GAAP financial measures for comparison purposes only. Please see the earnings release issued earlier today for a definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results. Joining us today on the call from Yatsen’s Senior Management CMR, Mr. Jinfeng Huang, our Founder, Chairman and CEO; and Mr. Donghao Yang, our CFO and Director. Management will begin with prepared remarks, and the call will conclude with the Q&A session. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on Yatsen’s Investor Relations website at ir.yatsenglobal.com.

I will now turn the call over to Mr. Jinfeng Huang. Please go ahead, David.

Jinfeng Huang: Thank you, Irene and thank you, everyone for participating in Yatsen’s first quarter 2023 earnings conference call today. The first quarter of 2023 showed a positive trend for the beauty industry. Total beauty retail sales achieved year-over-year growth of 5.9% in the quarter, according to the adjusted data published by the China National Bureau of Statistics. And movement in market sentiment and the gradual recovery of off-line consumption following the lifting of pandemic restrictions were major drivers of this upward trend. While we are pleased to see signs of recovery in the retail environment, we expected a rebound in our revenue to take time as consumers gradually reengage in travel, social activities and general consumption in the post-COVID era.

Our sights remain focused on long-term sustainable growth as we continue to refine our business model. For the first quarter of 2023, our total net revenue declined by 41% year-over-year to RMB765.4 million, beating the guidance we provided previously. Net revenues from Skincare Brands increased by 34.2% year-over-year to RMB245.1 million. Our clinical and premium brands, including DR.WU, Galenic, and Eve Lom, recorded a solid growth of 58.6% year-over-year for the first quarter of 2023. In terms of revenue contribution, our Skincare Brands accounted for 32% of total net revenues in the first quarter, up from 20.5% for the previous-year period. Net revenues from our Color Cosmetic Brands declined by 29.1% year-over-year to RMB508 million. In terms of profitability, we achieved ongoing improvement in our gross margin and net margin.

Gross margin increased significantly by 5.3 percentage points to 7.3% for the first quarter of 2023 from 69% for the prior year period, reflecting our persistent efforts to fine-tune our product mix, implement disciplined pricing and discounting – discount policies and optimize production costs. Most importantly, we recorded a net income margin of 6.6% for the first quarter of 2023 as compared with the net loss margin of 32.7% for the prior-year period. In addition to our efforts in cost optimization, the net income we recognized for the first quarter of 2023 was primarily to a reversal of recognized share-based compensation expenses of RMB109.4 million and a decrease of RMB42.2 million in recognition of share-based compensation expenses, using the greatest vesting method over the vesting term of the company’s awards.

Non-GAAP net loss margin narrowed to 2.4% for the first quarter of 2023 from 7.2% for the same period last year. Moving on from our financial highlights, we made progress in our product development and brand awareness improvement initiatives. Eve Lom launched its Radiance Face Oil, featuring 10 precious plant extracts that provide a spa level in nourishment, combined with 5 major reparative ingredients to firm and plump the skin. We also hosted a major brand event for Galenic influence to explore the legendary benefit of the brand platinum OG series with international fashion and beauty KOLs. During the quarter, our Color Cosmetic Brands also introduced Valentines Day-themed skin set, this campaign to celebrate the vibrant colors and passionated emotion associated with the holiday.

In terms of channel optimization, we completed most of our adjustments in our off-line footprint in 2022 as off-line consumption recovered due to the lockdown policies. Performance at our offline stores improved in terms of profitability during the first quarter of 2023. However, the market situation is still evolving, and the consumption activity has not fully returned to normal. Going forward, we will closely monitor market dynamics focused on identifying the appropriate product mix and growth strategy to drive sales in the offline business and adjust our approach to optimizing our off-line channels as needed. Next, I would like to share some of our recent R&D endeavors and accomplishments. Our R&D expenses as a percentage of total net revenue, were 3.2%, demonstrating our continuous commitment to scientific advancement and product development.

Furthermore, to promote applied research and application in chicken acne, we officially launched DR.WU Acne Research Fund and established DR.WU Esper Committee. Together, these organizations will integrate Esper’s resources across multiple medical bills and regions to conduct cutting-edge exploration and applied research with the goal of discovering solutions for the refined and comprehensive management of acne-prone skin. Before I conclude, I want to share an update on our environmental, social and governance performance, which continues to be a great source of inspiration for Yatsen. In January, we participated in the 2023 World Economic Forum annual meetings in Davos, Switzerland, where we highlighted Yatsen’s implementation of the sustainability practice through Perfect Diary, Little [indiscernible] lipsticks and other Yatsen’s products at event sustainability symposium.

In summary, the first quarter of 2023 was a promising start to gradual recovery of China’s beauty market in the post-pandemic era. We are cautiously optimistic about the outlook for the remainder of 2023. We are aware that uncertainties remain. We will continue to focus on brand building and product development as we work to draw upon our Skincare Brands’ strong growth momentum and prepare to launch new Color Cosmetic products in the second half of 2023. With that, I’ll hand the call over to our CFO, Donghao, to discuss our financial performance. Thank you, everyone.

Donghao Yang: Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in renminbi amounts, and all percentage changes referred to year-over-year changes, unless otherwise noted. Total net revenues for the first quarter of 2023 decreased by 14.1% and to RMB765.4 million from RMB891 million for the prior-year period. The decrease was primarily attributable to a 29.1% year-over-year decrease in net revenues from Color Cosmetics Brands, partially offset by a 34.2% year-over-year increase in net revenues from Skincare Brands. Gross profit for the first quarter of 2023 decreased by 7.5% to RMB568.7 million from RMB614.5 million for the prior-year period. Gross margin for the first quarter of 2023 increased to 74.3% from 69% for the prior-year period.

The increase was driven by, first, increasing sales of higher gross margin products from Skincare Brands; and secondly, more disciplined pricing and discount policies and certainly cost optimization across all of the company’s brand portfolios. Total operating expenses for the first quarter of 2023 decreased by 37.6% to RMB575.9 million from RMB922.5 million for the prior-year period. As a percentage of total net revenue, total operating expenses for the first quarter of 2023 were 75.2% as compared with 103.5% for the prior-year period. Fulfillment expenses for the first quarter of 2023 were RMB51.9 million as compared with RMB73.9 million for the prior year period. As a percentage of total net revenues, fulfillment expenses for the first quarter of 2023 decreased to 6.8% from 8.3% for the prior-year period.

The decrease was primarily attributable to a decrease in warehouse and logistics costs due to the outsourcing of most of the company’s warehousing and handling operations. Selling and marketing expenses for the first quarter of 2023 were RMB459 million as compared with RMB604.7 million for the prior-year period. As a percentage of total net revenues, selling and marketing expenses for the first quarter of 2023 decreased to 60% from 67.9% for the prior-year period. The decrease was primarily attributable to the closure of underperforming off-line stores and a reduction in share-based compensation related to the decrease in selling and marketing headcount. General and administrative expenses for the first quarter of 2023 were RMB40.7 million as compared with RMB208.1 million for the prior-year period.

As a percentage of total net revenues, general and administrative expenses for the first quarter of 2023 decreased to 5.3% from 23.4% for the prior-year period. The decrease was primarily attributable for reversal of recognized share-based compensation expenses of RMB109.4 million due to the forfeiture of unvested awards granted to our former Chief Technology Officer upon his resignation and a decrease of RMB42.2 million in recognition of share-based compensation expenses using the graded-vesting method over the vesting term of the company’s awards. Research and development expenses for the first quarter of 2023 were RMB24.2 million as compared with RMB35.8 million for the prior-year period. As a percentage of total net revenues, research and development expenses for the first quarter of 2023 decreased to 3.2% from 4% for the prior-year period.

The decrease was primarily attributable to the company’s efforts to maintain research and development expenses at a reasonable level relative to total net revenues. Loss from operations for the first quarter of 2023 decreased by 97.7% to RMB7.2 million from RMB308 million for the prior year period. Operating loss margin was 0.9% as compared with 34.6% for the prior year period. Non-GAAP loss from operations for the first quarter of 2023 decreased by 63.3% to RMB62.4 million from RMB170.1 million for the prior-year period. Non-GAAP operating loss margin was 8.1% as compared with 19.1% for the prior-year period. Net income for the first quarter of 2023 was RMB50.7 million as compared with net loss of RMB291.4 million for the prior-year period.

Net income margin was 6.6% as compared with net loss margin of 32.7% for the prior year period. Net income attributable to Yatsen’s ordinary shareholders per diluted ADS for the first quarter of 2023 was RMB0.08 as compared with net loss attributable to Yatsen’s ordinary shareholders per diluted ADS of RMB0.46 for the prior-year period. Non-GAAP net loss for the first quarter of 2023 decreased by 83.2% to RMB25.8 million from RMB153.6 million for the prior-year period. Non-GAAP net loss margin was 3.4% as compared with 17.2% for the prior-year period. Non-GAAP net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the first quarter of 2023, was RMB0.05 as compared with RMB0.24 for the prior-year period. As of March 31, 2023, the company had cash, restricted cash and short-term investments of RMB2.54 billion as compared with RMB2.63 billion as of December 31, 2022.

Net cash used in operating activities for the first quarter of 2023 decreased by 80.6% to RMB20.2 million from RMB104.1 million for the prior-year period. Looking at our business outlook for the second quarter of 2023, we expect our total net revenues to be between RMB761.4 million and RMB856.6 million, representing a year-over-year decline of approximately 10% to 20%. These forecasts reflect our current and preliminary views on the market and operational conditions, which are subject to change. With that, I would now like to open the call to Q&A. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Today’s first question comes from Dustin Wei with Morgan Stanley. Please go ahead.

Operator: Our next question comes from Casper [indiscernible] with CICC. Please go ahead.

Operator: [Operator Instructions] Our next question comes from Olivia Tong with Raymond James. Please go ahead.

Operator: Thank you. This concludes today’s question-and-answer session. I’d like to turn the conference back over to the management team for any closing remarks.

Irene Lyu: Thank you, once again, for joining us today. If you have any further questions, please feel free to contact us at Yatsen directly or TPG Investor Relations. Our company information for IR in both China and the U.S. can be found in today’s press release. Thank you, and have a great day.

Operator: Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.